Automated valuation models, known as “AVMs,” aren’t new. In fact, lenders and appraisers have used these computer-generated estimates of property values for some years as both a supplement to and substitute for an opinion of value prepared by a state-licensed appraiser.

So why has the state of Arizona turned Zillow’s “Zestimates,” which differ little if at all from other automated valuations, into a political ping-pong ball?

Automated valuation models, known as “AVMs,” aren’t new. In fact, lenders and appraisers have used these computer-generated estimates of property values for some years as both a supplement to and substitute for an opinion of value prepared by a state-licensed appraiser.

So why has the state of Arizona turned Zillow’s “Zestimates,” which differ little if at all from other automated valuations, into a political ping-pong ball?

Part of the answer may be that Zillow, for better and worse, happened to hit on a catchy name that has attracted a lot of attention. The public, the media, interest groups and now state lawmakers all seem oddly enamored of both Zillow and its “Zestimates,” which are no more than automated valuations by a sexier name. No other facts in evidence thus far have suggested any other less ludicrous reason why Arizona has targeted only Zillow and not any of the company’s many brethren in the same business.

Anecdotal evidence suggests that many and maybe even most of Zillow’s automated valuations are wildly off the mark as indicators of a property’s actual market value, however much Zillow may protest to the contrary. In general, AVMs tend to work well when many highly similar homes exist near one another and not so well when homes are custom-built or located in rural areas.

Anecdotal evidence also suggests that home buyers, sellers and even some real estate professionals have tried to use Zillow’s automated valuations to set asking and offer prices for homes on the market. That’s not smart because AVMs are subject to known limitations and statistical variances that may seem slight on a percentage basis but can translate into large amounts on an actual dollars basis.

Misuse of unreliable valuations may be a problem for some, but neither lousy data per se nor the misuse of lousy data is a good rationale to force Zillow to obtain an appraiser’s license in Arizona or elsewhere. Nor is the potential usefulness of an automated valuation a good rationale to create a specific exemption from state licensure. Either approach would only add more mud to already murky waters.

The appraiser’s license approach is wrong-headed because an appraiser’s license would suggest that an automated valuation was equivalent to or interchangeable with an appraisal, when such is not the case. Licensure is not a useful solution to the problem, but rather a clumsy, poorly disguised and anticompetitive attempt by appraisers to force AVMs out of the marketplace.

On the flip side, an exemption from state licensure would be equally misguided not only because such hair-splitting isn’t necessary, but also because an exemption would seem to give AVMs a regulatory free pass from any sort of regulation whatsoever.

What’s needed, at least for starters, is much less use of the “Zestimates” brand name to describe what is essentially an automated valuation, and much more use of plain English to discuss what automated valuations are, how they should and shouldn’t be used, and how they should and shouldn’t be regulated.

More education and more disclosure are in order as well. Web sites that make automated valuations available to the public need to explain how these data are calculated and disclose the advantages, disadvantages and limitations of the methodology. A statement that an automated valuation isn’t an appraisal isn’t adequate because it focuses on what an automated valuation isn’t rather than what it is. Information about the accuracy, reliability and applicability of automated valuations should be provided with simple examples and in plain language that doesn’t require a master’s degree in statistics for a reasonable home buyer or seller to understand it.

If legislators and regulators are determined, perhaps for political purposes, to try to protect the public from the misuse of automated valuations, one useful bit of lawmaking would be a government-mandated warning that AVM providers would be required to display, not on a separate page full of statistics, but immediately next to every AVM-generated valuation. Here’s a suggestion: “This valuation has been generated by a computer that uses an automated valuation model. Automated valuations may not be a reliable indicator of a property’s market value and should not be used to set an asking price or make an offer to purchase property.”

Now that would be zesty.

Marcie Geffner is a real estate reporter in Los Angeles.

Copyright 2007 Marcie Geffner. All rights reserved. No part of this article may be used or reproduced in any manner whatsoever without written permission of the author.

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